WASHINGTON — Investors will flee money-market funds if regulators require the funds to move to floating net-asset values, a market expert warned Monday.
“They will depart from the product and move out,” said Robert Brown, president of the money market group in the fixed-income division of Fidelity Management & Research Co.
When asked where retail investors would turn, Brown said: “The obvious answer is to bank products.”
Brown’s remarks came at the Investment Company Institute’s money market funds summit, at a panel discussion entitled, “What’s Next for Money Market Funds?”
Another panelist at the ICI summit also voiced concerns about a floating NAV, saying it has the potential to exacerbate, not prevent, a run on money-market funds, especially among institutional investors.
“I think the floating NAV would emphatically not stop runs,” said John Hawke Jr. a partner at Arnold & Porter LLP here who formerly was Treasury undersecretary for domestic finance and comptroller of currency. “I don’t think we ought to be regulating the entire industry without clearly identifying what the problem is.”
Last week, the Securities and Exchange Commission and other regulatory officials weighed recommendations for money-market funds made last October by the President’s Working Group on the Financial Markets. The working group suggested several reform options, including requiring money market funds to move to floating net-asset values from the current stable $1 per share NAV.
But a county official representing the Government Finance Officers Association at the SEC’s roundtable opposed such an approach, saying state and local governments rely on stable NAVs when investing their operating cash in the funds.
Money market funds are the largest investor in short-term municipal securities, holding 65% of the $500 billion that are outstanding, according to the president’s working group.
In September 2008, the Reserve Primary Fund “broke the buck,” dropping below $1 per share, after the collapse of Lehman Brothers, spurring a run on money market funds and the establishment of a temporary federal guarantee program.
